An emerging crisis in China could give US the upper hand in trade talks

China, which is home to about half of the world's pig population, has been ravaged by an outbreak of African swine flu recently, a virus for which there is no cure or vaccine.

This could lead to higher hog prices, which could force China to make concessions in its negotiations with the U.S., says Bank of America Merrill Lynch analyst Ross Gilardi.

A worker disinfects a vehicle as a police officer walks by, near a farm where African swine fever was detected, in Yulin, Shaanxi province, China March 9, 2019.

Reuters

China's worsening African swine flu crisis could give the U.S. an edge over China as the two countries try to hammer out a trade agreement, an analyst at Bank of America Merrill Lynch said Tuesday.

China, which is home to about half of the world's pig population and the biggest pork consumer, has been ravaged by an outbreak of African swine flu recently, a virus for which there is no cure or vaccine. The outbreak has led to more than a million pigs being culled, according to the Chinese government. The flu is harmless to humans but is deadly and contagious to pigs.

This could lead to even higher hog prices, which are already putting pressure on the Chinese consumer and could force China to make concessions in its negotiations with the U.S., analyst Ross Gilardi wrote in a note to clients.

"We are not sure if the market appreciates how a worsening epidemic of African swine fever for China's massive pig population could further force China's hand on a broader trade war compromise," Gilardi said. "The growing threat is rampant pork price inflation for the masses, which puts more pressure on China to lift 62% import tariffs on US pork even though US pork imports are already up sharply versus pre-trade war levels."

Lean-hog futures have rallied 52.4% this year and are among the best-performing commodities of 2019. The only commodity outperforming lean hogs is RBOB gasoline, which is up about 60% year to date. Meanwhile, the S&P 500 is only up about 16.4% this year.

U.S. and Chinese officials have indicated recently that both sides are coming close to a trade deal. Earlier this month, Chinese Vice Premier Liu He said a new consensus has been reached in the negotiations, according to China's state news website Xinhua. In March, Treasury Secretary Steven Mnuchin said the two countries had "constructive " trade talks.

Still, the African swine flu crisis is "seemingly weakening" China's hand and "could also lead it to relax US soybean restrictions, which would be helpful to the US farmer, and be good for equipment demand," Gilardi said.